SF Inclusionary Zoning Requirement Found to be Infeasible
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RPBG Member and Principal of JAB Real Estate, Sam Goldman, came across an interesting report from the Office of the Controller / Office of Economic Analysis with the City and County of San Francisco. The report is recently dated: dated March 10, 2023, and it concludes that the current inclusionary housing requirements in San Francisco (city and county borders are the same) are “infeasible.”
Why is this important, and what does it have to do with Chicago or Rogers Park?
Inclusionary zoning requirements have rendered new development infeasible at currently mandated requirements.
While Chicago and San Francisco are different in many ways, both have in common municipal governments that have grown increasingly hostile to housing providers and multifamily housing developers. In both cities, local requirements for inclusionary zoning have grown more onerous over the years. In both cities, developers of multifamily housing have warned city officials that there are financial limits to the amount of inclusionary housing that can be mandated before those developments are no longer financially feasible to build.
Now, the Controller’s report from San Francisco finds that these fears are not just idle talk from disgruntled developers. The Controller’s office website states that the office is tasked with ensuring “the City’s financial integrity and accountability.” As part of the local government apparatus, it is hard to claim that it is biased against the city/county government, or likely to side with private sector interests for partisan reasons.
The report finds that, in San Francisco at least, inclusionary zoning requirements have rendered new development infeasible at currently mandated requirements.
Some of the specific findings of the Controller’s report include:
- “Based on our consultant’s research, we find current inclusionary housing requirements to be infeasible.”
- “At 2022 on-site requirements, every prototype studied was not financially feasible.”
- “Under the in-lieu fee options, at current fee percentage requirements, again no prototype studied could support recent land costs.”
The report goes on the say that current on-site requirements of 21.5% to 23.5% for apartments and condominiums, and 30% to 33% for off-site and in-lieu fees, are above the “maximum supportable” percentage ranges.
The Controller’s report from San Francisco finds that these fears are not just idle talk from disgruntled developers.
The report finds that on-site development can only support set-asides in the 12% to 16% range. Off-site developments or in-lieu fees can support a higher range – 22% to 29% – but still not as high as currently mandated under existing inclusionary zoning law.
Here in Chicago, inclusionary zoning appears to still be feasible in the highest cost downtown neighborhoods where recent tax reduction legislation at the state level has provided some relief to local inclusionary zoning requirements. The same does not appear to be true in most non-downtown locations where rents are generally lower and state-approved tax benefits are not as generous as they are in the downtown core.
In Chicago, San Francisco and other, large US cities where far left political representation is on the rise, the trend in inclusionary zoning has been to continually increase set-aside requirements, regardless of financial impact or overall feasibility.
Worse, these elected officials seem to take a dim view of capitalism itself and are suspicious of any system that rewards risk with profit. They don’t seem to understand (or simply don’t care) that real estate development also has downside risks such as cost overruns and volatile market conditions that can result in a loss of capital or even bankruptcy.
In San Francisco, this belief system appears to have run into the wall of financial reality.
To the political far left, it seems to be political orthodoxy that real estate development is always profitable and that real estate developers should not object to having some of their “windfall profits” contributed back to lower-income residents in the form of reduced-cost apartments.
In San Francisco, this belief system appears to have run into the wall of financial reality. Having pushed the inclusionary zoning requirements too far, the city is now experiencing a reduction in new construction which is further aggravating the housing shortage from which the city has long suffered.
No one knows how many housing units have not been built in Chicago since these mandates have been put into place, but it is likely a very large number.
The same fate may await Chicago which recently saw a new slate of far left candidates elected to both the Mayor’s office and many Aldermanic districts. Even before these elections, many of the most left-leaning elected officials in Chicago were pushing to further expand the inclusionary zoning requirements from the current 20% maximum up to 30% or higher. Some of these elected officials have gone so far as to say that 30% should be the minimum requirement.
Now that the 2023 elections have concluded, it seems almost inevitable that inclusionary zoning will be up for debate once again, and that there will be even greater support for increasing the set-aside requirements, regardless of the financial consequences or negative impacts on overall housing production.
Even under the current version of the ARO, the loss of housing production in Chicago has been profound, resulting in a reduction to the city’s housing supply and an increase in its cost. No one knows how many housing units have not been built in Chicago since these mandates have been put into place, but it is likely a very large number.
Rogers Park is a good example of a neighborhood where the current ARO requirements have had a huge negative impact on feasibility and where opposition to new, market rate development is strong. Any expansion of ARO mandates beyond what is currently in place will only make matters worse.
The San Francisco Controller’s office report should be viewed as the proverbial canary in the coal mine. The only real question is, will anyone notice or care if the bird falls ill and dies, or will ideology, once again, rule the day?
